Zimbabwe CSD Conference: David v Goliath?

AfricanisCool — Tue, 12 Jan 2010 21:08:28 +0000

Introduction

We had hoped to post this blog earlier but we had to wait for the presentations that subsequently never arrived. So it’s late and we never got the presentations. This is for an event that will probably be the single most important market development initiative for the ZSE.

The Zimbabwean SEC held a conference at Pandhari Lodge on 11 November 2009 to discuss the implementation of a central securities depository. It was interesting to see vendors of various systems strut their stuff. On one end there were the big boys of CSD systems, STRATE and on the other side Collen Tapfumaneyi, a Zimbabwean. A modern day David versus Goliath scenario appears to be evolving here. Collen knows the ins-and-outs of the transfer and settlement business not only in Zimbabwe but another half a dozen countries in Africa. His contention is that a solution should be grown locally. I kind of agree. Its like having one of those huge V8 General Motors 4X4 trucks in Africa – yes its cool but it guzzles gas, you can’t get spares and its more than you need. Lets go with a basic Toyota Hilux, its mileage is 456,000 and we made most of the parts ourselves. OK its not the best analogy but I am sure you get my gist.

I have previously covered the problems encountered in using Big Boys’ software in Africa . Key CSD problems experienced when smaller markets are involved with big systems are insufficient cash or skills, insufficient market structures. The current initiative in Zimbabwe is no different. It has significant challenges. There is no financially sustainable business model that can be provided by the bigger vendors in the absence of critical mass of listed companies and liquidity to pay for it.

So lets propose the following:-

Go with the local solution as it acknowledges the absence of finance – this will force all the players to gather round
Identify and mitigate every big risk arising from this approach
Get everyone involved so the solution is truly market-wide
Then in 10 years or 15 years consider a STRATE system or the like when Zimbabwe’s GDP has recovered to its levels in the 1990s.

We have presented the key highlights below in bullet form. It’s all the good stuff. There’s a bit of competition in the process to discover an appropriate system for Zimbabwe. This is healthy. But there’s no cash to pay for it. This is unhealthy. And listed companies aren’t being consulted. Again, unhealthy.

Our comments on a few basics:-

In order to get the word out and for people to consider seriously the impact of a CSD, full information should be provided. In other words, the SEC should submit the presentations of the speakers as promised. That way interested parties (like us) can present a balanced view to those that might pay for it one day: investors and listed companies.
Importing external software may not be justifiable in the absence of a holistic business model. It is absolutely necessary to have a sustainable business structure.
Many vendors offered funding to the SEC should their systems be chosen. What about in 10 years time?
Collen Tapfumaneyi provided key practical insights into the core key issues that highlight what the key CSD factors are in a country like Zimbabwe. We like this approach. Everyone treats local markets from a top-down perspective rather than bottom-up i.e. what does the market need?

Key highlights of the presenters

Opening remarks – Willia Bonyongwe, SEC Chairperson

The SEC was established in September 2008, primary objectives:

Encourage and promote full disclosure
Regulate brokers, transfer secretaries, asset managers, the ZSE e.t.c.
Contain systematic risk in the equity markets
Create an enabling environment for the capital market to operate efficiently
Promote provision of required investor information.
Ensure investor protection
Pioneer and advocate for the commodities exchange

Lamented the manual trading on the ZSE yet is the second largest market in the SADC region

(No e-copy of the opening remarks available)

Creating an enabling legislature – Charles Selemani

Regulation compliance is best practice
Move from certificated certificates to book-entry CSD to achieve investor protection through elimination of fraudulent certificates, duplicates e.t.c.
Need to harmonise the Companies Act and the Securities Act
The two pieces of legislature contradict themselves to some extent, e.g.:
Section 99 of Co.s Act states that there should be an instrument of transfer before effecting trade, while
Section 70 of the Securities Act states that no instrument of transfer is required for trade to take place. Just book-entries will suffice.
Argues that there was no need to have a new Act altogether, but amending the Companies Act to cater for electronic trading would have been enough
Ownership of the CSD can be a combination of several players, e.g. Gvt., major banks, the ZSE and the SEC
Legislature states that issuers can issue either certificated or un-certificated securities, but to trade the securities, they must be dematerialised first.
Also a shareholder cannot vote at the AGM unless his/her name appears in the CSD system at least 48 hrs before the AGM commences – loopholes/cost to shareholders if the CSD or the brokers are inefficient.
Securities Act does not render commissioners immune from liability, but it provides for the immunity of the CSD staff – commissioners may not take risky decisions

(E-copy of the presentation to be emailed to us by the SEC on Friday, 13 Nov 2009 – this was not done)

Current trading and settlement platform – Murray-Lynton Edwards

Dwelled on the basics of the three main branches of securities trading:
Trading – open cry system
Scrip – manual
Settlement – T+7

(No e-copy on this section provided. None requested)

User of CSD in Kenya – Rose Mambo

CSD was implemented in 2004
In 2007, electronic trading was introduced
In 2009, bond electronic trading was introduced
Worried about the investor protection
They don’t have the investor protection fund as we have in Zimbabwe, but
They have a Guarantee Fund to guarantee settlement
2010 to implement settlement caps, where the max value of trades by any broker should not exceed the value of LCs deposited by the broker with the Settlement Guarantor
3 brokers closed for trading securities belonging to clients
There was a lot of investor and issuer resistance to use the CSD for quite some time
Now about 50% of the securities are in CSD
Trying to integrate the use of the CSD system into the region (Tanzania, Uganda e.t.c.) to enable free trade of cross-listed securities
Engaged by Rwanda to help and manage the Rwandan CSD
CSD being managed by MIT
MIT was bought by the London Stock Exchange
Spoke at length about the challenges they faced throughout the project phases
Most of the interesting information was tabulated stats which are available in the presentation – a long one.

(E-copy of the presentation to be emailed by the SEC on Friday, 13 Nov 09 – this was not received a pity)

Strate, SA – Anthony van Eden

Now considered among the top 5% best CSDs in the world
Proposed to finance the project should they the SEC opt for them
Highlighted on the lengthy walk to being where they are – the presentation shed more light

(E-copy of the presentation to be emailed by the SEC on Friday, 13 Nov 09 – this was not received)

Role of the transfer secretaries – Collen Tapfumaneyi, Corpserve

Proposed the establishment of an independent CSD company
Highlighted the need for stakeholder engagement
Indicated that the transfer secretaries do have some in-house software which can serve the purposes intended by the CSD
Highlighted that the systems might not be perfect, but they are the starting point, then do a Gap Analysis to determine what else is missing but required, so that they can be upgraded to meet the local needs
Feared that the human capital might not be available to fully implement the CSD system in Zimbabwe
Also indicated that the costs of doing this might outweigh the benefits in the interim if software is outsourced at such high costs
Lamented the effectiveness of managing parallel runs, where CSD manage the uncertificated securities while transfer secretaries manage the certificated shares – creates loopholes for fraud and confusion

(E-copy of the presentation is available online view here)

Chartered System Integration – Sam Dimairho

Only Microsoft accredited vendor of MS software in Zimbabwe
Have done CSD jobs in several markets
Proposed funding should they get the job.

In short, the CSD issue in Zimbabwe is a complex one. Good stakeholder communication and consensus building is required as is a healthy mix of long termism.

African Investor Relations » depository

Zimbabwe CSD Conference: David v Goliath?

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